Hundreds of North Bay apartments involved in bankruptcy reorganization

[caption id="attachment_19684" align="alignright" width="288" caption="George Mendoza purchased Mountainview Villas in southeast Santa Rosa in mid-2002 for $12 million and is expecting to sell it in April for $12.5 million. (Jeff Quackenbush photo)"][/caption]

Related storyMendoza Investments launches property management arm

PETALUMA – Genora “George” Mendoza, an investor in more than $100 million in mostly North Bay and Bay Area residential income properties, is emerging from U.S. Bankruptcy Court protection with a confirmed reorganization plan to pay off $82.2 million in real estate loans, property taxes and other debts over three to five years.

The plan, confirmed in a Santa Rosa courtroom on Feb. 22, culminates more than two years of efforts by Mr. Mendoza's Petaluma-based Mendoza Investments to stabilize a portfolio that included 16 multifamily properties – most in the North Bay – with 646 units; three office buildings in Memphis, San Francisco and Petaluma; 15 single-family rental homes in Florida and South San Francisco; and Mr. Mendoza's current and former homes in Penngrove and Novato, respectively, valued at $3.5 million each, according to court documents.

Judge Alan Jaroslovsky is expected to issue an order confirming the plan shortly as some remaining details are worked out, according to Mr. Mendoza's Sonoma-based attorney, John MacConaghy.

Key among the details are repayment of $45 million in first deeds of trust to Chase, which picked up the loans of defunct Washington Mutual, and more than $8 million in mostly junior notes to First Republic Bank. That should allow the rest of the properties to be "unimpaired," or to repay the loans on the modified terms.

"We're in mop-up mode now," he said. "All we need is for the real estate market to stabilize."

That "mop up" includes the close of escrow on a second property from the portfolio and court hearings in the second half of April on claims from a first-deed lender on 60 apartments in Rohnert Park, the first note holder on Mr. Mendoza's former home in Novato and a related case brought by an individual secondary investor, who lent $5.1 million in eight notes on seven properties.

A real estate investor for four decades, Mr. Mendoza's business model has been buying properties with poor management and maintenance, acquiring higher-interest secondary loans to make debt payments until better managers and renovations would attract tenants and increase income enough to bring positive cash flow and then sell them for a profit.

To keep that model going, he would have to sell a certain number of properties per year to fund future and recent acquisitions, but the "recent, dramatic freezing of the income real estate and credit markets" prompted Mendoza Investments to file for reorganization on June 3, according to court filings.

Under the plan, "a few" of the properties would go back to some of the 10 senior and junior lenders on the remaining properties. Yet most of the notes would be modified to include principal, accrued interest, attorney's fees and other costs. Payments would be interest-only. The first deeds of trust would be due in three years and paid based on the lesser of 4.5 percent or the original note annual interest rate. Junior lenders would be paid net cash flow on the properties or about 6 percent, whichever is less.

Also part of the plan, about $1 million in property taxes and penalties would be paid over five years to Sonoma, Marin, Contra Costa and San Francisco counties as well as jurisdictions in Tennessee and Florida.

Key to the plan is Mr. Mendoza's ability to sell enough property to pay off or pay down junior lenders with notes collateralized with multiple properties, ability to meet rental income projections, accuracy of modified note balances and willingness of lenders to accept negative amortization on their modified loans, according to the document.

One property has sold since Mendoza Investments filed for Chapter 11 reorganization June 3, two have been lost in foreclosure and the sale of one is pending.

Last fall, Mendoza Investments sold the 59,000-square-foot Chancery Building in San Francisco, purchased in 2000 for $12 million, to Sausalito-based Chelsea Pacific Holdings for $9.2 million to pay off a $7 million first deed to Wells Fargo Bank and a $1.1 million second to Tamalpais Bank, according to court records.

First Republic Bank's $8.6 million in mostly junior notes are secured by four properties, the 78-unit Mountainview Villas and 178-unit Pioneer 2000 in Santa Rosa, 84-unit Crestview Pines in Antioch and the vacant 314,000-square-foot former FedEx headquarters in Memphis. The estimated market value of the Crestview Pines property is about $350,000 below the debt to, in order of priority, Chase, First Republic and a private individual investor.

Mr. Mendoza last week said he is encouraged that he will be able to get back to selling properties, after fielding a number of calls from buyers who were not offering enough and a number of unfruitful escrows.

"Three or six months ago there were very little sales, but there has been much more activity in the last 10 days," he said on Wednesday. "My telephone rang six times today with interested people to buy one or four or seven or all my properties."

Multifamily real estate broker Scott Gerber of NorCal Commercial said there are a number of North Bay property owners who purchased properties in the past five years, particularly after mid-2007, facing lower property values, higher expenses and lower rents, leading to crimped cash flow.

Nonetheless, he and Katherine Higgins of Bradley Real Estate said there are several deals completed or in escrow so far this year. Ms. Higgins said sellers have been pricing properties to sell, coming up with creative private financing and renegotiating existing notes.

"It's a complete turnaround from a year ago," she said.